The Economy

Because I work in public finance, people have been asking me what's happening. The basic answer is that the Bush administration failed to effectively regulate banks, investment banks, and mortgage companies, and loans were made without satisfactory underwriting standards relating to both income of the borrowers and valuation of the property acquired. The bad credit loans were often pooled into high risk, high yield securities that lost value rapidly as real estate values tumbled. This occurred over a year ago and was the first sign of an impending implosion as now even many better mortgage loans which are held directly in the portfolio of banks have turned sour.

My only additional insight into what has happened is that I believe the real estate industry is as guilty as the banking community for the mess. The realtors even more than the mortgage writers make their money on the closing fees and commissions at the time of the transaction. A 1997 change in tax law encouraged by the real estate industry (and enacted during the Clinton administration) on the sheltering of capital gains (up to $500,000 for a married couple) from the sale of residential property encouraged churning. The untaxed profits from one transaction now created the leverage for another acquisition as buyers bid up prices (and realtors commissions) to unrealistic levels. The unreality of these values was obvious to anyone who did basic math over the past four years (but maybe not now), and came to the pretty obvious conclusion that it was more advantageous to rent than to own.